Postings on books (mainly non-fiction), a few films and matters of interest by Lorenzo from Oz (aka Downunder)

Monday, April 6, 2009

The Mystery of Economic Growth

The Mystery of Economic Growth by Elhanan Helpman, a commentary on recent economic growth scholarship, is a moderately useful short book. Economics can be highly abstract and the book is a bit jargon-heavy, even given the comprehensive glossary, for other than the determined lay reader.

Still, if one perseveres, there is a lot of useful information in it based on burgeoning cross-country and cross-time empirical studies. I especially liked the discussion of how trade liberalisation is particularly good for small countries (pp58ff), a nice antidote to free trade agreements hand-wringing, as well as the last two chapters on inequality and on politics and institutions.

The chapter on inequality is full of interesting results – such as inequality of land-ownership is a measurable negative for economic growth but inequality of income on its own is not: and even the former is confined to non-democratic regimes (p.92ff).Read More...Income inequality within countries rose slightly in the C19th, dropped in the first half of the C20th, and has risen only slightly since. Income inequality between countries increased dramatically in the C19th and first half of the C20th but has been moderately stable since (p.88ff).

The widening gap between the wages of skilled and non-skilled seems to be predominantly driven by technological change, with trade and immigration effects being much less significant (p.94ff).

Where the data is unambiguous is the effect of economic growth on the poor: a rising tide really does raise all boats. In 1820, over 90% of the world’s population lived on $US2 a day or less; over 80% lived on $US1 a day or less (1985 prices). By 1992, about 50% of the world’s population lived on $US2 a day or less, just over 20% of the world lived on $US1 a day or less. Looking at data for 137 countries, there is almost a one-to-one relationship between economic growth and the income of the poorest fifth of the population.

The chapter on politics and institutions covers interesting studies, but, as the author notes:

the study of institutions and their relations to economic growth is an enormous task on which only limited progress has been made so far (p.142).

I particularly liked the study of entry-costs – the costs of regulations for setting up a firm. These varied from 0.5% of per capita GDP in (surprise!) the US to 460% of per capita GDP in the Dominican Republican (wow, I wonder where will have more economic activity …). Hernando de Soto’s point quantified.

The author really needed an interested non-economist to help him add in the de-jargonised clear English explanation at various points (I could see he was trying). Still, an informative short text.